Next spending wave could be sustainable

The Washington Post

Updated 8:41 pm, Monday, November 26, 2012

The following editorial appeared in the Washington Post:﻿﻿

As the year draws to a close, the mind turns to might-have-beens. Economists are no exception. A number of them are relitigating the Obama administration's efforts to bail out distressed homeowners, telling the Post that a more aggressive approach would have pumped more cash into more households faster, bolstering consumer spending and economic growth. The recession might have ended sooner.

Not necessarily, administration defenders respond; the United States still would have suffered from the effects of the 2011 tsunami in Japan and the 2012 drought. And that's assuming a big mortgage-relief plan could have overcome the political opposition that met President Obama's efforts. Who's right? Certainly, homeowners have not benefited as much as one might have hoped from the Federal Reserve's low-interest-rate policies. Though the Fed has driven the average 30-year mortgage rate down to an all-time low of about 3.3 percent, most loans guaranteed by Fannie Mae and Freddie Mac are still above 5 percent. And, about a fifth of homeowners owe more on their homes than they are worth. Yet there have been no mass refinancings or principal write-downs.

Last year, Glenn Hubbard, a Columbia University economist and Mitt Romney adviser, suggested giving about 25 million borrowers already in government-backed loans a near-automatic refinance at 4 percent. That would have provided the equivalent of a long-lasting tax cut worth $70 billion per year, he argued.

All such plans, however, have costs as well as benefits.

The costs of a plan such as Hubbard's would have fallen mainly on the owners of Fannie Mae and Freddie Mac bonds. Mass prepayment of those securities at less than current market value would have hit banks, pension funds and insurance companies hard. No doubt these institutions would have passed the costs along, blunting the stimulative effect of mortgage relief.

Maybe the good news is that this is increasingly a moot point. Housing is healing, albeit slowly, as are household balance sheets. This sets the stage for renewed consumer spending. If Americans learn the right lessons from the last decade, the next wave of consumer-led growth may be more sustainable.